Help with money creation questions.?

Use the following information on the total banking system for each of the four problems. Complete each problem separately.








Legal Reserves = $ 110 b


Currency in Circulation = $ 100 b


Checkable Deposits = $ 800 b


Small Denomination Time Deposits = $ 1500 b


Reserve Requirement = 12.5 % of Checkable Deposits








PROBLEM # 1 (1 point each)





From the information given above determine each of the following.





1. How much is the money multiplier (potential deposit multiplier)?


2. How much is M1 and how much is M2?


3. How much is required reserves and how much is excess reserves?


4. How much is the banking system’s lending capacity?





PROBLEM # 2 (1 point each)





Assume that the banking system begins to create money by making loans to customers up to the value of the excess reserves (which you determined in Problem # 1 above) until the banking system is “fully loaned up” (no excess reserves) and all money created by making loans returns to the banking system as checkable deposits. At the end of the day and the banking system is “fully loaned up” determine each of the following.





1. Now how much is M1 and how much is M2?


2. When the banking system is “fully loaned up”, now how much is required reserves?





PROBLEM # 3 (1 point each)





From the information first given above (do not include the changes in the problems above), assume that depositors decide to withdraw from their checkable deposits accounts a total of


$ 30 b. Of the total withdrawn, $ 20 b is transferred to small denomination time deposits and the other $ 10 b is added to currency in circulation. Determine each of the following after the withdrawal.





1. How much is M1 and how much is M2?


2. How much is required reserves, how much is excess reserves and how much is the lending capacity?

















PROBLEM # 4 (1 point each)





Assume that the banking system begins to create money by making loans to customers up to the value of the excess reserves (which you determined in Problem # 3 above) until the banking system is “fully loaned up” and all money created by making loans returns to the banking system as checkable deposits. At the end of the day and the banking system is “fully loaned up” determine each of the following.





1. How much is M1 and how much is M2?


2. When the banking system is “fully loaned up”, now how much is required reserves?











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